The Revised Cyprus- India Tax Treaty marks the beginning of a New Trading Relationship with India
Three years of unclarity and uncertainty over Cyprus’ position as a notable alternative tax jurisdiction for India, due to the absence of exchange of information between the jurisdictions, has now come to an end.
The new Double Taxation Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income between Cyprus and India has now become official through the execution of the new treaty by representatives of the two countries. The new treaty is expected to come to effect in April 2017 after it has been sanctioned by the governments and once the treaty is in force, the Indian authorities will withdraw Cyprus as a “notified jurisdiction” retrospectively from 1st November 2013.
The new double tax treaty solves the previous treaty’s absence of exchange of information provisions by mirroring article 26 of the OECD Model Treaty. Furthermore, amicable cooperation and communication is expected to occur between the two jurisdictions in regards to the collection of taxes.
The Treaty’s main provisions which provide valuable investment opportunities for Indian companies are as follows :
· The new treaty makes provision for a source based taxation test in regards to capital gains generated from a sale of shares which in turn substitutes the residence based test which was the method used in the old treaty. Thus, if a Cyprus tax resident company sells shares owned in an Indian tax resident company such a transaction may be taxed in India.
· Grandfathering provisions have also been put into place, which allows for the disposals of assets, up to 1 April 2017 for the purpose of being able to take advantage of the old residence regime test of taxation. Gains from the sale of shares acquired prior to 1 April 2017 will only be subject to tax in the country of the seller, irrespective of the time that these sales are actually sold. This will provide certainty for already existing investors, forthcoming closings and for the alienation of assets. Thus, it provides an opportunity to proceed with the implementation of new structures whereby a Cyprus company acquires the shares in Indian tax resident companies prior to 1 April 2017 to utilize the tax free sale of shares in the future.
· Withholding tax rates of 15% on dividends and 10% on interest from India to Cyprus of the previous treaty will continue to apply. However, the withholding tax rate is reduced to 10% if the beneficiary is a company that holds at least 10% of the shares of the company carrying out the dividend payment.
· Royalty and service payments are subject to a 15% withholding tax in India which is reduced to 10% withholding tax for payments relating to technical, managerial or consulting service payments. [ an amended definition of ‘permanent establishment’, which has been broadened and the withholding tax on royalties has been reduced from 15 per cent to 10 per cent.
furthermore, dividends, interest and royalties bear no withholding tax in Cyprus, in accordance with local legislation, when sent to non-Cyprus residents.
Cyprus and India have extensively relished admirable trade and investment relations in the past and the new treaty, which clears all uncertainty from the existing treaty between the two countries, is expected to promote the increased use of Cyprus as a door into and out of India. The enthusiastic response of Cyprus to the announcement that it will be removed as a “notified jurisdiction” evidently demonstrates that the Cyprus authorities are committee to indorse transparency and promote the communication for information for tax purposes for the sake of solidifying investor relations with treaty partners such as India.
To conclude, the Cyprus-India treaty also augments Cyprus as an investment funds jurisdiction of choice. Cyprus will now be able to offer investors appealing investment opportunities in India through an EU fund vehicle, at a time when India is economically growing and continues to evolve as a global investment hub.